By Larry Cossio
In the last 34 years I have spoken to countless business owners about insurance. One of the most common questions is, “Why is my insurance so expensive?”
It is interesting how many people judge the quality of their insurance purely off its cost, with little regard given to the coverage their premium buys. What many people do not realize is the importance of the components of their insurance policies, such as exclusions. We have seen several claims where there was no coverage for an exposure due to exclusions on the policy. You must also be mindful of how your policy is rated, whether it is based on a percentage of your gross sales or per unit in your inventory. The concepts in this article may keep you up at night, but it will provide information on how to keep your insurance costs down by minimizing your risk exposure and paying attention to the details.
Insurance is something that we all hate to pay, a necessary evil, but when a claim occurs we are always glad we have it. But what happens to that premium, the one you pay that you already thought was too high to begin with, when you have claims?
The first thing to understand is that insurance rates are based on exposure, so if you are a brand new business without an insurance track record, you could pay a higher rate. It is the same concept that can be applied to auto insurance. If you have three to five years in business with no claims, you would be considered a “preferred risk” and get the lower rates. Compare that to a business owner with incidents once or twice a year. His or her premium will continue to escalate as each year progresses because he or she is considered a “substandard risk.”
Let’s take a look at a couple of claims and see how it impacted the insured’s premiums.
The first example is an indoor inflatable center franchisee with a pre-claims premium at about $3,400. They incurred around $388,000 in claims and their premium jumped up to $70,000. Upon review, we identified several of the issues leading to their claims:
Inflatable rides with rips and tears.
Allowing multiple people to come down the slide at the same time.
Allowing multiple people to climb up the wall at the same time.
Not following manufacturer’s written instructions.
The next example is an indoor bungee trampoline setup in different malls with the pre-claim premium of $47,000. After $135,000 in claims their premium jumped to $100,000. Here’s why:
The operator was pulling on the child’s leg to get the child to bounce higher. The child was too small and fell out of the harness.
An adult customer was doing flips and aggressive movements and tore his bicep. The operator should have been monitoring the customer.
In another incident, someone caught a weird bounce and was injured when they hit the frame.
A family fun center had a pre-claims premium of about $35,000. After $300,000 in claims the premium increased to $76,000. Why?
A go kart hit a safety rail, causing it to come down and cut off the claimant’s toe. The claimant was wearing open-toe shoes.
Another family fun center was originally paying $7,500 in premium, but then it increased to $16,000 after $27,000 in claims was paid. Why?
Guests were hot inside the party room and one guest tried opening the window to get fresh air. The window fell down and crushed a child’s thumb.
A party equipment rental company had an insurance policy that was based on the number of units in inventory instead of gross sales. This means the policy only covers listed items on the application.
The insured borrowed a unit from a competitor in his area for an event and there was an injury on that particular unit. The carrier denied coverage for the loss as it was not listed on his inventory sheet. The claimant had head injuries and a broken foot, the reserves for this loss were over $1 million. The insured’s premium went from $23,000 to $52,000.
A different party equipment rental company previously paid $23,000 in premium.
An 8-year-old child fell off of a device and injured his shoulder. The parents stayed at the party with the child after the incident and refused to go to the hospital. Six months later they filed lawsuit. The claim paid out $25,000 and his premium increased to $38,000.
A paintball park has a pre-claims premium of $2,600.
The insured had an old bus on one of the fields. A customer went into the bus during play and fell through the rusted floor of the bus, cutting his leg. The leg became infected and the insured was hit with a $550,000 claim. His premium increased to $8,000 and continues to rise as more expenses are paid on the claim.
Another paintball park allowed a team to set up an inflatable bunker field on his premises for practice.
They did not pound the stakes all the way below ground level. One of the players that helped set up the field slid into a bunker and suffered a laceration on his leg and knee. The amount paid on this claim was over $70,000.
There is another incident where the claimant slipped on paintballs on the ground and broke his hip; the reserves on that claim are at $196,000.
He was paying $34,000 before the claims. The renewal premium came in at $84,000.
Now that we have scared you, let me explain what you can do as business owners to minimize your liability risk. It’s not that hard to address the issues that usually are causing the claims
Lack of trained supervision is the number one cause for incidents. Too many business owners attempt to lower costs by getting rid of employees to lower payroll.
Overloaded inflatables (too many participants on the unit).
Unenforced rules at the go kart track, such as long hair not up, open-toe shoes and no control on the track.
Maintenance of the equipment (operating equipment with rips or parts broken).
The absentee owner is a leading cause of incidents increasing at the workplace.
OK, what can you do as a business owner to minimize your liability risks and to keep your insurance premiums in check? As you can tell by the number one cause of claims being lack of trained supervision, this is the first line of defense.
If you are in the entertainment world you need to have adequately trained employees and have the training well-documented. If you train your employees verbally there is no defense for you in a court of law. If it’s not documented, dated and signed, it didn’t happen. Work with the manufacturers to make sure that you have an operations manual for the equipment and structure your training around the manual and the ASTM standards.
The second item was overloaded inflatables, which usually causes injury due to an excessive amount of people on the unit at one time. With slides there should only be one person on the slide at a time with the next person staged at the bottom of the slide ready to go up the ladders. This is the only way you can control the flow of participants on your slide. Some states require an attendant at the bottom and the top for a reason. Another useful tip is to never allow parents to go down the slide with their child on their lap. There are several claims of a child’s arm or leg being broken as they come down on their parent’s lap. If the child is too small or too afraid to go on the ride it probably is not a safe practice to allow them on that device. You will be doing yourself and your customer a favor by not allowing them on rides not designed for their size or age. It is very important that your employees separate kids on the devices according to size and age to minimize the risk of a larger child falling on a smaller one.
Let’s address the issues of a go kart track. This is usually the highest income earner for a family entertainment center. But it is usually the highest exposure for bodily injury. Most claims are because simple safety guidelines are not followed. Items you need to make sure that are addressed are no open-toe shoes or heels, long hair is in a bun or hat so that it does not become entangled in the cart drivetrain. Since most children’s first experience of driving happens on a go kart track there will be circumstances where they will naturally overdrive the go kart. This can include going too fast, forgetting where the brake pedal is or bumping into another car. It is important that your employees know where to stand and not to stand on a go kart track, such as never in front of a go cart or in between go carts. It is important that they pay attention at all times and are not texting with their friends. It is important that you have a qualified and trained employee on the kill switch and they understand when to use it.
Let’s discuss the simple issue of maintenance on your equipment. Do you have a maintenance log for your employees to check the equipment each day before use? Is it signed and dated? Do you allow inflatables to be used that might have a rip or tear in them? Do you allow your bungee trampoline to go out without changing the bands at a minimum of once per year? Do you allow your Rockwall to be operated without changing the cables at a minimum of once per year? Do your employees review the paintball field and all bunkers for any hazards prior to each day that you allow the public to enter? Do your employees review your family entertainment park for any trip and fall hazards, cracks in the concrete walkways, loose bricks, broken water lines or sprinkler heads, electrical outlet cover plates missing? Do you have the correct signage on your facility and around your entertainment devices? Are you following ASTM standards on the operation of your facility or the entertainment devices?
Are you an absentee owner that has hired someone to run your business while you attend to your other job or businesses? How often do you follow up with your managers to see the paperwork being done, the checklists being completed, to review any training that is going on, discuss any injuries or incidents on the same day that it happens? As we all know, when the cat’s away the mice will play. Do you have video cameras on-site to record what is going on at your facility? The investment is usually around $2,500 and one claim will far exceed this dollar amount. The video playback can be used after an incident for training purposes for your employees and also as a defense to a claim. But this is a double edge sword because it might also show that the negligence falls on your employees.
Remember that ignorance is not a defense in court. If you do not know the ASTM standards for your business and are not following them you are leaving yourself open to lawsuits, increased premiums, and difficulty finding a carrier that wants to insure you for any reasonable amount. It is important that you purchase the correct insurance with the correct coverage so that if and when a claim happens you have coverage that will actually defend you. It is very important that you work with an experienced insurance broker that understands entertainment risks. You would not go to your podiatrist for a toothache. You would be surprised how many people believe that business activities are covered under their homeowner’s policies. –
(Larry Cossio has been an insurance broker for 34 years and has developed several insurance programs for hard-to-place risks. A popular speaker on insurance issues for several industries, he can be reached at Larry@cossoinsurance.com.)